Small Business Advice

What Are Trade Debtors and Trade Receivables?

15 Mar 2021

As business owners, bookkeeping and accounting can often be the part of the role we dread the most – and terms like trade debtors and trade receivables certainly don’t help. The fact is, to all intents and purposes, many organisations out there can treat the two terms as one and the same. 


Trade debtors are a completely normal part of the everyday reality of trading. Basically, when you raise an invoice for goods or services supplied, you create a trade debtor. In some instances, the term relates to the people or entities that owe you money. In other cases, people will refer to the amounts owed as being the trade debtors. In most cases, trade debtors will constitute either all of what’s outstanding at any one time or the vast majority of that. 


Trade receivables means much the same thing, except your business may be owed money for something other than goods or services supplied. For example, if you loaned another business capital, that would count as a trade receivable on your balance sheet. The same could be said when you sell a capital asset and are awaiting payment. 


Bookkeepers will count goods you sell as assets too, but they – and the invoices generated for selling them – get classed differently from when you sell a capital asset like machinery or a vehicle, for instance. The difference is that you hold capital assets longer-term, whereas, with other assets like items in stock, you’re expected to turn them into cash in a relatively short period.


Generally, for most businesses, the slight difference between trade debtors and trade receivables doesn’t become an issue – and many either use one or the other to mean the same thing or use the terms interchangeably without causing problems.

Trade debtors, trade receivables, and upping your invoicing game

For most of us, whether we call it trade receivables or trade debtors, the important thing is staying on top of the revenue coming into the business and the money going out. So, bearing in mind that most companies out there will be invoicing for good services, or even a bit of both, let’s concentrate on how you can make sure your trade debtors or receivables don’t turn into bad debts.

Nearly every small business out there could benefit from improving how they invoice for work or goods supplied. It’s often something that gets put off when it should be one of your highest priorities in reality. That’s because, without invoices, there can be no cash flow. To keep that aspect of your business healthy, it’s essential to have a reliable system in place for billing your clients promptly and consistently. 

Taking the time to develop good habits in this area can make a massive difference to how your enterprise runs. That doesn’t just apply to improving your cash flow, either. You’ll spend far less time dealing with payment issues when you put the right system in place.

accounting

Trade debtors versus trade receivables

Not everyone in business is there because they love chasing money, doing the books, or even talking about costs. Many small business owners find this aspect the least desirable, and a lot of people run an enterprise because of a love for the work, not the bookkeeping. That’s where having standard, transparent systems in place can help you avoid much of the time it takes to administrate your business. Here are a few things you can do to get things ticking over more smoothly.

  1. Be clear about payment terms

Always start off on the right foot with new clients. It’s important to communicate clear payment terms from the off. That way, both parties will know precisely where they stand, and there can be no haggling or disagreements later. It’s helpful to have something in writing. While that can seem awkward for some business owners, the fact is, it just removes much of the potential for awkwardness in the future. Having your payment terms in writing also means you’ll have something to refer to if a problem arises.

Be realistic about your payments terms. While it’s sometimes tempting to feel like you need to be generous in order to attract and retain customers, remember that quality products and services achieve that. Don’t set terms that make day to day trading a constant uphill battle. Give clients a bit of time to pay, but not too long. Most small and medium businesses operate in 30-days.

  1. Make time to invoice regularly, and get it right

Without it, you can’t operate, so take the time here and there to invoice customers. Think of it like if there’s going to be a 50-day delay before you get paid, the clock won’t even start ticking until you send an invoice. Your suppliers won’t wait, and neither will your employees, so make sure to do your invoicing once a job is complete or goods get delivered. 

Take the time to make sure there are no mistakes on invoices and include more information than you think is needed rather than running the risk of confusing your customer – failing to do both is likely to lead to delays in receiving payment.

It’s a great idea and one of the most straightforward steps you can take to improve payment times, to include your bank details on every invoice. Not every delay is down to reluctant payers, so provide everything your customer needs to pay the invoice quickly.

  1. Find out who controls funds and send invoices to them

This is another simple but highly effective way to get paid more quickly. Don’t just send the invoice to your regular contact. They’re likely a buyer, but that doesn’t mean they’re responsible for paying too. Find out who is, and cut out any extra steps in the payment process by emailing them directly. 

  1. Stay on top of any overdue amounts

You’ve set clear payment terms, supplied and invoiced for goods or services on time, so you’re entitled to get paid on time too. With your system in place, you should never feel awkward about chasing payment – and in most cases, it’ll simply be an oversight. If you use accounting software, it’s easy to send an initial reminder a day or two after debts become due. After that, you’ll need to give the relevant person a call and a gentle, polite reminder.

What can you do if a customer doesn’t pay an invoice?

Even if you have to chase the odd payment (which is par for the course when running a business), it should never go too far beyond that point. So, what can you do when it becomes clear your customer just isn’t going to pay? 

You’ll need to follow a specific process when this happens. Start by sending the customer a copy of your original payment terms agreement – which comes in particularly useful at this stage. You’ll need to remain calm and polite, but be firm and convey that you won’t let the matter go. Be clear that you will file a claim in the relevant court if they haven’t settled the debt in seven days. Date the letter clearly, and base any future income on that.

Read More: What is Invoice Finance?

Trade debtors and trade receivables: filing a claim for an unpaid debt

If your 7-day request goes unanswered or unpaid, you’ll need to go further. When the amount owed exceeds £5,000, you can issue a statutory payment demand. That’s a standard document demanding payment within 21-days. Once that period passes, you can take court action. Statutory payment demands are usually very effective because failure to address one means you’re entitled to apply to make the debtor bankrupt.

For amounts below £100,000, a business can turn to the Small Claims Court. Keep all documentation relating to the debt, including a signed order or contract and your 7-day payment demand. You can file a claim online, and the debtor will need to pay both the debt and court costs in the event you’re successful.

Read More: Debtor Control

Our Xero accountants can help! 

If you are a small or new business, you may be able to get by with a spreadsheet to track your invoicing. However, if your company is growing, we definitely recommend using an invoice tracker system, which is often included as part of a cloud accounting software such as Xero.

This will collate all your business’s invoice information in one place and provide alerts when payments are due so you are less likely to miss a payment. As one of the country’s leading Xero accountants, we can help your business set up Xero and train you on how to use the software. 

Get in touch today to find out more about how Xero can help you to further your business, or try our instant accounting quote tool and get a fee in just a few clicks.

Related: Moving From Sage To Xero

Sylwia Kotarba-Harris

photo

Associate Director

0207 043 4000

About the author

In addition to a BA (Honours) in Accounting, Sylwia also has a law degree, becoming legally qualified, deciding not to pursue career as a solicitor and instead reverted back to accounting.

Before opting for accountancy, Sylwia worked in various commercial roles, including sales for a prestigious business organisation, business development and high level client care/management skills at Gordon Ramsay’s head office, working as a VIP liaison.

Sylwia is a member of ACCA and joined Accounts and Legal in 2015. Her clients range from software development consultants to multinational wholesalers. Notably, Sylwia recently worked with a London gym and a new chain of supermarkets.

Outside of work she enjoys travelling more than anything else, having visited 5 continents in the last 2 years.

  

We can help your business grow

 

We're accountants who specialise in working with small businesses, from start ups to growing businesses. With offices in London and Brighton, we're a highly cost effective solution for compliance but also for strategic planning, bookkeeping, tax and accounting support

 

Call us today or get an instant quote for our services!

 

Instante-Quote-Accounting